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San Antonio-based Tesoro Corporation (
- Analyst Report
recently announced that it will be offering $925 million of senior unsecured notes. The offering is divided into two parts - $450 million 4 1/4% senior notes due 2017 and $475 million 5 3/8% senior notes due 2022.
Tesoro will be using the net proceeds from the offering along with available cash to repurchase all of its outstanding 6 5/8% senior notes due 2015 and 6 1/2% senior notes due 2017. The remaining proceeds, if any, will be used for general corporate purposes, such as funding the retirement of outstanding tender offer notes, working capital, capital expenditure, and the refinancing or repayment of debt.
Tesoro expects the proceedings to be complete on September 27, 2012, subject to customary closing conditions.
Tesoro Corporation ended the second quarter of 2012 with long-term borrowings of $1,350 million. The debt-to-capital ratio was 23.4% at the quarter end. With the issuance of $925 million of debt, the debt-to-capital ratio will increase to 34.0%.
We also expect interest expenses to increase with the sale of the new notes.
The company is involved in a number of high-return projects that are expected to be cost effective. These projects will not only boost the company’s competitive position among its peer group, but will also provide significant earnings and cash flow growth visibility.
Following a hiatus of more than two years, Tesoro has recently reinstated its dividend payout. The company also announced a $500 million share repurchase program. We believe that the resumption of dividend and the buyback authorization not only highlights Tesoro’s commitment to create value for shareholders but also underlines the company’s confidence in its future earnings momentum.
Additionally, a major advantage for the company is the scale and diversification benefits afforded by its portfolio of seven refineries. Recently, in a bid to form the largest U.S. oil-refining realm in the Pacific Basin, Tesoro Corporation has agreed to acquire Carson refinery and associated business units from London-based BP plc ( BP - Analyst Report ) .
Overall, we believe Tesoro is well positioned going forward and view it as an attractive investment.
We maintain our long-term Outperform recommendation, supported by a Zacks #1 Rank (short-term Strong Buy rating).
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